DBRS Confirms Cascades Inc. at BB, Stable

DBRS Limited (DBRS) has today confirmed the Issuer Rating of Cascades Inc. (Cascades or the Company) at BB with a Stable trend. The recovery rating is also confirmed at RR4, implying that no notching adjustment is required to arrive at the instrument rating; thus, the Senior Unsecured Debt rating is also BB with a Stable trend. While the confirmation reflects that, overall, the credit profile remains acceptable for the current rating, the Company’s financial risk profile has deteriorated further. The business risk profile, which is strong for the current rating, has also weakened somewhat as a result of the continuing challenges in the strategically important North American tissue market. As noted previously by DBRS, the current rating assumes improving operating performance. If this is not achieved, a negative rating action may be necessary.

Performance from continuing operations in 2014 was modestly below DBRS’s expectations. Overall, the financial profile deteriorated for the last 12 months ended Q1 2015 as all key credit metrics weakened aside from interest coverage. Debt/EBITDA weakened to over 5.0 times (x) for the first time since 2012, a leverage level not generally associated with the current rating category. Note that (1) the increase in total debt compared to YE2013 occurred in spite of over $100 million of net debt repayments, which reflects the translation impact of the weaker Canadian dollar on Cascades’ U.S.-dollar debt and (2) debt-to-capital rose because of the reduced equity base from reported losses (impairments and losses on discontinued operations).

While the Tissue segment was again the source of the second-largest contribution to sales and operating earnings in 2014, the sector has been buffeted by excess industry capacity for the last two years and this dynamic persists in 2015. The deteriorating performance in the Tissue business as a result of the unbalanced aggregate supply/demand fundamentals is weakening Cascades’ overall business risk profile. DBRS notes that a significant portion of Cascades’ recent capital spending has been for capacity expansion (in addition to modernization) of its Tissue operations; however, the Company has attempted to focus its capacity expansion on pockets of the market that remain undersupplied, such as the Pacific Northwest United States.

Despite these headwinds, continued good demand for containerboard in the United States that was reflected in the Q1 2015 results, the ramp-up of the new U.S. tissue facilities and the Italian boxboard plant as well as the impact of completing the restructuring of non-core and underperforming assets should enable the Company to achieve positive growth in 2015. This would allow for another free cash flow surplus, further debt reduction and improved metrics. In particular, DBRS expects Cascades to make progress toward improving its adjusted debt-to-EBITDA to approximately 4.5x over the next six to 12 months.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2015) and Rating Companies in the Forest Products Industry (June 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.